My old pal and foreclosure guru Ramsey has penned another insightful missive that he was kind enough to let me post here on Piggington. I’ll let the essay speak for itself, but I will add in regard to the conclusion that I think this shows why the Fed is trapped in the monetization game at this point (and why there is little chance that they will stop until forced to do so). Read on…
Has real estate bottomed?
by Ramsey Su
That is a trick question. There is no correct answer. That question is too broad. A broad answer would be correct and incorrect at the same time, when applied to more specific properties in terms of price, location, type, etc.
That said, it is possible to use a set of criteria to answer that question when the scope is narrowed, using the good old econ 101 stuff – supply and demand.
DEMAND
The current demand appears to be heavily concentrated at the entry level. Buyers are taking advantage of historic low rates and are not burdened with an existing home/mortgage. Coincidentally, investors with cash are also active at this level because higher priced properties generally do not pencil well as rentals.
I believe this pool is relatively small. Economic conditions, especially employment, is not supporting a normal level of household formation. Many would be first time buyers today had already been sucked into the market during the subprime era and are part of the delinquent statistics. Those who have already been foreclosed upon will not be qualified to re-enter the pool for a few more years, depending on how diligently they clean up the credit blemish.
Trade up buyers are non-existent. They will remain dormant until prices start to catch up with their mortgages. Without building up some equity, there is nothing to trade up with.
SUPPLY
The current supply phenomenon is a first for me, during my 35 years in the business. Specifically, I have never seen such a huge supply of willing but unable sellers. Every homeowner with negative equity is an unable seller, at the price that meets demand. A big chunk of supply has been removed from the market because of over encumbrance, in addition to those who are not willing to sell until they can their price. It is so strange that the physical inventory is plentiful everywhere and yet, the majority of these properties are not sell-able.
The current supply is created by REOs, short sales and the sellers with ample equity who must sell for whatever reason. Builders also are unable to supply the current demand, since they may be building at negative net margins. Consequently, there is an acute shortage of housing for the current demand.
SUPPLY DEMAND GAP
Once again, this is a phenomenon that I have never experienced. Normally, when there is a supply demand imbalance, prices will either move up or down to some form of equilibrium. The current demand is capped by affordability. The supply cannot voluntarily reduce the price to meet demand, resulting in a huge gap between what demand can pay and what supply can sell at.
With all the ill-conceived modification plans and government intervention to date, this gap is widening. Instead of gradually closing the gap, properties are removed from the unsellable pool into a sellable pool via foreclosure of short sales. For example, a property with a $500,000 mortgage is not sellable but if the lender forecloses or agree to a short sale at market price of, say, $300,000, the exact same property becomes not only sellable but high in demand.
FINANCING
Financing is on life support. How long can the government support it?
First look at FHA. Here is the "Highway Trust Fund" bill. The headline is adding $7 billion to the highway trust fund. What on earth does it have to do with FHA? Look at Sec. 3 here:
http://thomas.loc.gov/cgi-bin/query/D?c111:3:./temp/~c111THpiWv::
SEC. 3. FHA MORTGAGE INSURANCE COMMITMENT AUTHORITY.
-
The item relating to `Federal Housing Administration–Mutual Mortgage Insurance Program Account’ in title II of division I of the Omnibus Appropriations Act, 2009 (Public Law 111-8; 123 Stat. 966) is amended by striking `$315,000,000,000′ and inserting `$400,000,000,000′.
One little paragraph and FHA insurance received an increase of $85b to $400b.
If you look at SEC. 4, GNMA got an extra $100b also. This is the way our government sneak expenses past unsuspecting citizens? In comparison, the $2b cash for clunker debate seems totally silly. Bernanke or Geithner can fund that out of petty cash. Anyway, I digressed.
So we know that FHA funding is there and will continue to insure loans, many of which will be on the delinquent list for years to come. For 2009 so far, FHA’s market share of mortgage origination is in the 20% range.
For the first half of 2009, FRE purchases and issuances totaled $319b.
http://www.freddiemac.com/investors/volsum/pdf/0609mvs.pdf
Similarly, FNM issued $470b for the same period.
http://www.fanniemae.com/ir/pdf/monthly/2009/063009.pdf
FNM estimates $2.5 trillion of total mortgage origination in 2009.
http://www.fanniemae.com/media/pdf/economics/2009/Summary_072909.pdf
Our forecast for mortgage originations is of course heavily conditioned on Federal Reserve policy. As it currently stands, we expect to see roughly $2.5 trillion in originations in 2009, with more than half of that already behind us, and a decline to around $1.5 trillion in 2010 in the event the Fed ends its mortgage-related programs at the end of 2009, as current policy states. The drop off is almost entirely in refinance volumes as the end of the purchase program will almost certainly bring an increase in both mortgage rates and spreads.
Combined, FRE and FNM issuances totaled $789b for the 1st half of 2009. At this pace, their combined market share should be about 63% of mortgage originations.
More worrisome is the fact that this mortgage debt is purchased by Bernanke’s printing machine. For the first half of 2009, the Federal Reserve has purchased $621b of agency MBS, at the pace of over $20b per week.
http://www.newyorkfed.org/markets/mbs/purchasesarchive/purchases_archive.html
Using data above, I am estimating that GOVERNMENT CONTROLLED FINANCING HAS A WHOPPING >80% MARKET SHARE of mortgage financing and THE FEDERAL RESERVE IS PURCHASING OVER 60% OF THESE MORTGAGES. The significance of the government’s role in financing is unprecedented and grossly under appreciated.
This is not monetary policy or stimulus, this is government takeover. There is no plan for FRE and FNM aside from continuously funding their losses. We are more than half way through 2009 and the real estate market is completely survived by Bernanke’s purchases. In six months, Bernanke’s announced MBS purchase plan would be over. He is on pace to use up every penny of the $1.2 trillion he printed for this purpose. What is his exit plan for 2010?
Go back to the demand discussion above — how much of that demand would vanish if this government financing is not available? How many buyers would be removed from the demand pool for each fractional increase in mortgage rates?
CONCLUSION
Has real estate bottomed? The real estate market is in such a precarious position supported by an unbelievably accommodating Federal Reserve that I find it difficult to call it anything. The current market is unsustainable, something needs to change. Bernanke must announce his plan for mortgage manipulation soon. Geithner is wasting more time and money with silly modifications.
In my opinion, if Bernanke discontinues his agency MBS purchase plan, the market will collapse overnight. The suspense will soon be over.
I’m not sure what to make of
I’m not sure what to make of this write-up. There are lots of important points, but I think the actual conclusion is the author believes real estate shouldn’t be at the bottom, but can’t figure out whether it is or not due to current and possible future government interference.
Is that the point?
The point is that we are in a
The point is that we are in a very confusing, frustrating and manipulated market that is not reacting to normal forces nor will it anytime soon.
the message seems pretty
the message seems pretty clear to me
the real estate market is only being supported with printing press money – as soon as the printing press money is removed
“the market will collapse overnight”
4plexowner wrote:the message
[quote=4plexowner]the message seems pretty clear to me
the real estate market is only being supported with printing press money – as soon as the printing press money is removed
“the market will collapse overnight”[/quote]
So, then the conclusion would be we are at the bottom as long as the government keep pouring money in.
Therefore, since everything we’ve seen so far suggests that the government will continue to pour money in, then we must be at the bottom!
(for a recent example of the government’s behavior, see extension of the cash for clunkers)
the conclusion I would draw
the conclusion I would draw is that we are in a CON-fidence game – as long as printing press money continues to flow AND the people’s confidence can be maintained, the real estate market will continue along its current path
human’s are fickle creatures and confidence can be lost overnight
~
one of the points that Ramsey makes quite eloquently is that there are many properties that are un-sellable because the ‘owner’ is underwater
About half of U.S. mortgages seen underwater by 2011
http://www.reuters.com/article/GCA-Housing/idUSTRE5745JP20090805
as more and more properties become un-sellable, the market becomes more and more unstable and the CON-fidence game becomes harder and harder to maintain
~
more challenges to the CON-fidence game:
American Incomes Head Down, Threatening Recovery in Spending
http://www.bloomberg.com/apps/news?pid=20601068&sid=aRU6ZUwzT9iA
Surprise shrinkage in service sector
Quells notion of rapid recovery
http://www.washingtontimes.com/news/2009/aug/06/surprise-shrinkage-in-service-sector/
US food stamp list tops 34 million for first time
http://www.forbes.com/feeds/reuters/2009/08/06/2009-08-06T152646Z_01_N06328040_RTRIDST_0_FOODSTAMPS-USA.html
~
this snippet from Richard Russell’s daily missive is relevant to the CON-fidence game:
“All the currencies of the world are tied to nothing of intrinsic value.” — Cato Institute, August, 2009
Russell Comment — Sadly, we’re working for, and saving with, fantasy concepts (i.e. fiat currencies), units dreamed-up and created by men at institutions that we call central banks.
That is the question. How
That is the question. How long can we pump money into the hole of this bubble? I mean, we have pumped a lot already. And yet the results so far have not really been as dramatic as I would think, considering the quantity spent. I’d say stagnant relative to how much they’ve thrown at it. Places under 500k move. Even get multiple bids. The higher end seems to be in limbo for the most part, w/increasing inventory.
I have no doubt that the government will try to continue to prop it up. But at what cost? When will they just realize their efforts are not helping, particularly in the long run? If you ask me, the patient is dying and on life support. If you pull the plug, the patient will die. The patient is not breathing on his own.
The printing press is the machine hooked up to the patient, the real estate market.
They need to figure out how to get the patient to breathe on its own and w/all the money they spent already, a better route would have been to get higher paying jobs created. JMO.
In the past 10 years we’ve basically kept the patient alive w/2 bubbles and a printing press. I can’t wait to see how this ends. Create another bubble, but what? Spend like there’s no tomorrow?
jpinpb wrote:…..If you ask
[quote=jpinpb]…..If you ask me, the patient is dying and on life support. If you pull the plug, the patient will die. The patient is not breathing on his own.
The printing press is the machine hooked up to the patient, the real estate market.
They need to figure out how to get the patient to breathe on its own and w/all the money they spent already, a better route would have been to get higher paying jobs created. JMO.
In the past 10 years we’ve basically kept the patient alive w/2 bubbles and a printing press. I can’t wait to see how this ends. Create another bubble, but what? Spend like there’s no tomorrow?[/quote]
I couldn’t have said it better. As for what’s next, I think it has to be inflation. (I hate to even say that in print, because it raises hackles of people who are equally certain that deflation will be the lasting consequence of all this, but I think inflation is the future.)
This was a great article by
This was a great article by Ramsey Su, Rich. Thanks to him for writing it, and kudos to you for bringing it here to us Piggs.
patientrenter wrote:I
[quote=patientrenter]I couldn’t have said it better. As for what’s next, I think it has to be inflation. (I hate to even say that in print, because it raises hackles of people who are equally certain that deflation will be the lasting consequence of all this, but I think inflation is the future.)[/quote]I think you may well be right, but doesn’t the money have to end up in our hands? It’s gotta be more than just cash for clunkers, otherwise how we gonna buy those twenty dollar loaves of bread?
sdcellar wrote:…doesn’t the
[quote=sdcellar]…doesn’t the money have to end up in our hands? It’s gotta be more than just cash for clunkers, otherwise how we gonna buy those twenty dollar loaves of bread?[/quote]
Agreed, sdcellar. I lived through the 1970’s, and there was stagflation. Inflation was high without much increase in prosperity. So it can happen.
Where might all the extra dollars first show up as inflation? That’s like looking up at a dam that’s overfilling, and wondering where the spill will begin. It’s hard to tell. But here are 2 possibilities.
1. If home prices start reflating (because of so much easy money), then cashout refis, HELOCs, and huge gains on home sales could supply many hundreds of billions of additional spending.
2. If the dollar drops a lot, then import prices (including oil) will increase a lot, causing a knock-on effect throughout the economy.
3. Higher govt spending will outlast the emergency phase we’re in
My personal bet is on 2, with maybe some assist from 3 and 1.
Absolutely great article.
My
Absolutely great article.
My money will ride on the Feds continuing the process. This is nothing but a confidence game.
What is it like over 12 trillion the govt has pumped into the game that we know about?
Do people know that this is more then all of the outstanding mortgage debt? Yes that means that the govt could have taken that 12 trillion and paid off every single mortgage in America. That is somewhat staggering isn’t it? (Note I got this stat from a colleague so someone can easily correct me if I am wrong)
Anyways I do agree with the outlook from Ramsey. However in no way can I see the existing administration let things crash and burn. They need things bad enough so that people will roll over and crawl to the govt for help while giving away more and more freedom, but not so bad that they will get voted out of office.
Thus they will prime the pump as needed… As long as China plays nice the house will continue to win.
Excellent article!
Thanks for
Excellent article!
Thanks for sharing this with us, Rich, and thanks to Ramsey Su for his insightful analysis.
Agree that the Fed/govt is not nearly done, and that they will destroy the dollar before we see the end of this.
“”
You are correct.
The Fed
“”
You are correct.
The Fed has 90% of the Sheeple believing deflation is the worry. Since it is all about confidence they are lucky people are so gullible.
By the way, a Prescription I take just went up 9.00 and my parents rent up in Portland just went up 9%. My electric charges are up 25% since 2005.
Deflation?
The looming inflation will soften the continued decline in real estate and will reverse the down trend much sooner than otherwise. Inflation will make every asset class rise except interest rate sensitive investments, but none will rise faster than what used to be the only recognized money for 3000 years (except for the last 37), Gold and Silver.
Gold is nothing special, just something shiny. But only something that is limited in supply and is hard to get can work as money. U.S. dollars are being printed by the trillions so are they scarce and limited? Maybe for you but not for the government.
Rocks could be good as gold if there was a limited supply.
John and and Arraya I don’t
John and and Arraya I don’t disagree with you however I have the full faith that our government can play the shell game longer then you guys think they can.
Your implication of this impending doom seems to be rather open ended.
SD Realtor,
It’s possible
SD Realtor,
It’s possible they can play this game indefinitely, but there are growing cracks in the facade. This new revelation about the day before Hank and Ben stormed Congress is a big deal.
“Paulson’s Calls to Goldman Tested Ethics During Crisis”, by Gretchen Morgenson and Don Van Natta Jr., New York Times, August 8, 2009.
Even bigger is another recent event. I’m reading this one as an indication that Administration figures realize that, in particular, the High-Frequency Trading market wouldn’t survive an independent COMSEC audit, and Larry’s got his finger squarely in the dike.
“Security Cyber Czar Steps Down”, by Siobhan Gorman, Wall Street Journal, August 4, 2009.
Even though they’ve just thrown flash-trading off the back of the troika, I don’t think the wolves are going to slow down until they’ve caught a few more victims. Whole sectors of this system look ready to blow.
SD Realtor wrote:John and and
[quote=SD Realtor]John and and Arraya I don’t disagree with you however I have the full faith that our government can play the shell game longer then you guys think they can.
Your implication of this impending doom seems to be rather open ended.[/quote]
Maybe, maybe not. Personally, I don’t think any governments or central banks have that much control over this thing. To me, it looks like a run away train that just past a bridge out sign.
Yes guys but it looked like a
Yes guys but it looked like a runaway train in 06, 07, 08 and 09. Now not only is it a runaway train but conductor and crew are spending money at the federal level NEVER BEFORE seen in our time. So do you guys really think the train will be allowed to derail on thier watch?
Furthermore if you want to discuss dislocations never before have we witnessed such a concentration of power given to the treasury via recently passed legislation. That is compounded by a population that is content with giving more authority to a government “take care of them” then ever before as well.
Yes fundamentally it is all looking bad but by the same token it is also fundamentally setting up for a very sustained period of hocus pocus as well. Not only will the power base be sustained but it will grow more. Lobbyist will actually increase thier control as conditions deteriorate. Have you looked at some of the contracts that big pharma is working on right now with the government for the health care legislation?
The more things change the more they stay the same and I believe that as things deteriorate the more we will be told that we need to be taken care of and those presses will be fired up.
I’ll play the contrarian once
I’ll play the contrarian once again. Someone has to throw a healthy dose of optimism into this pot of doom and gloom.
The spread between an average mortgage and a 10-year is typically around 1.5%. It spiked above 2.5% last winter, because things were looking too scary (“flight to safety”). Today it’s back to 1.5% again.
http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=MORTG,GS10,&transformation=lin,lin,&scale=Left,Left,&range=Custom,Custom,&cosd=1991-04-01,1991-04-01,&coed=2009-07-01,2009-07-01,&line_color=%230000FF,%23006600,&link_values=,,&mark_type=NONE,NONE,&line_style=Solid,Solid,&vintage_date=2009-08-09,2009-08-09,&revision_date=2009-08-09,2009-08-09,&mma=0,0,&nd=,,&ost=,,&oet=,,
Why is it at that level today, despite all Fed’s money-printing efforts? Because private investors are holding back and that counteracts money printing.
And why are they holding back? Because they think that house prices are still falling. Because they are still a bit afraid that continued declines will finally bring down FRE and FNM. Recall that Fed-approved “stress test” scenarios assumed two more years of nationwide price declines.
If the concept of housing bottom reenters public consciousness, eventually purchasing agency MBS will become unnecessary. Investors will keep the spread at 1.5% all on their own, and private lenders will reenter the market.
Even if they don’t – suppose that the Fed stops buying up agency MBS and private investors are still out of the market; interest rate spread may well jump up to 2.5% again, which would put mortgages in low 6’s. Slightly unpleasant for homebuyers, but hardly a collapse.
sobmaz wrote:””
You are
[quote=sobmaz]””
You are correct.
The Fed has 90% of the Sheeple believing deflation is the worry. Since it is all about confidence they are lucky people are so gullible.
By the way, a Prescription I take just went up 9.00 and my parents rent up in Portland just went up 9%. My electric charges are up 25% since 2005.
Deflation?
The looming inflation will soften the continued decline in real estate and will reverse the down trend much sooner than otherwise. Inflation will make every asset class rise except interest rate sensitive investments, but none will rise faster than what used to be the only recognized money for 3000 years (except for the last 37), Gold and Silver.
.[/quote]
Employment and wages are deflating. This is observable and measurable. If those two things keep deflating, how will inflating help anything? The banks are still clogged up and the average consumer is tapped out. The only way to inflate is handing money out.
Personally, I think we are deflating, which will lead to currency problems once the USG can’t service it’s obligations and has to print. Which will lead to a bond market dislocation and all around chaos.
Arraya wrote:Employment and
[quote=Arraya]Employment and wages are deflating. This is observable and measurable. If those two things keep deflating, how will inflating help anything? The banks are still clogged up and the average consumer is tapped out. The only way to inflate is handing money out. [/quote]
This has been my question b/c I really want to understand. The government can print every day to the end of time. BUT if it’s not circulated and people aren’t spending, then I don’t even know how you get inflation. I admit my lack of knowledge here. If you ask me, the real estate bubble we just went through was inflationary times w/high home prices, car prices, gas prices, etc, all thanks to free money circulating like wild fire.
If we have deflating jobs and wages, then who are going to buy high priced anything?
Oh, I know sdr has a cult of mega rich people buying up houses for cash. I still don’t know what percent of the population that is. Is it 20%? 30%? What about the other high percentage of people that are not spending, do not have money to play in the inflation round?
jpinpb wrote:This has been my
[quote=jpinpb]This has been my question b/c I really want to understand. The government can print every day to the end of time. BUT if it’s not circulated and people aren’t spending, then I don’t even know how you get inflation.[/quote]
This is the point that I start to get a headache as well. I think it’s a time-factor thing. The trillions of dollars that have been printed don’t result in immediate inflation, but will (must) over time based on the law of supply and demand. Basically, the people who get the newly printed money first, like the banks and others on Wall Street, get a sweetheart deal. The middle and lower-class people get the shaft because by the time they get any of that money it will have lost value.
greekfire wrote:The trillions
[quote=greekfire]The trillions of dollars that have been printed don’t result in immediate inflation, but will (must) over time based on the law of supply and demand.[/quote]
I believe things are somewhat more complicated than that.
First, we already got the money in the form of loans which were not and could not be repaid. This created very high inflation for a time, but was not sustainable, since it only replaced incomes lost to off-shoring pressures.
Second, there is an unlimited and virtually free supply of third world labor, which enables supply to jump to demand without balanced cost.
What we are seeing today, is the collapse of an empire and the financial obliteration of it’s citizens. I am not entirely convinced those in power are as stupid as we would believe, and strongly suspect much of this was by design.
That said, we do now have a runaway train, and the law of unintended consequences has come home to roost.
GH,
“First, we already got
GH,
“First, we already got the money in the form of loans which were not and could not be repaid. This created very high inflation for a time, but was not sustainable, since it only replaced incomes lost to off-shoring pressures.”
DING DING DING
The printing presses were not printing between 2001 and 2007 in terms of physical currency. But the credit bubble caused inflation. That inflation was very understated because housing was not factored into the CPI.
Now, the printing presses have been running, but credit is collapsing faster than the printing presses, leading to a net decline in spendable money. This deflation is leading to a drop in wages and in many prices.
If the FED prints $10T tomorrow, or lending to the common man starts up again at 10% fractional reserve, then we’re going to see pretty big inflation.
greekfire wrote:jpinpb
[quote=greekfire][quote=jpinpb]This has been my question b/c I really want to understand. The government can print every day to the end of time. BUT if it’s not circulated and people aren’t spending, then I don’t even know how you get inflation.[/quote]
This is the point that I start to get a headache as well. I think it’s a time-factor thing. The trillions of dollars that have been printed don’t result in immediate inflation, but will (must) over time based on the law of supply and demand. Basically, the people who get the newly printed money first, like the banks and others on Wall Street, get a sweetheart deal. The middle and lower-class people get the shaft because by the time they get any of that money it will have lost value.[/quote]
Good points.
What we have to do is watch where the money is going (not to J6), and try to determine what **they** will do with the money.
From everything I can tell, the growing disparity between the rich and the poor will grow wider even more quickly than before. What do “rich” (really rich, not newly-minted millionaires) people do with their cash while poor people become poorer? We also have to consider what’s going on globally WRT supply and demand of labor and goods.
I’m thinking basic materials, miners, international companies, stocks, short-term bonds in different currencies, precious metals, and some real estate.
There are a lot of US dollars floating around out there in foreign countries, and I’m beginning to wonder when it will be unleashed. Lots of people/entities from foreign countries looking to off-load dollars might be interested in real estate. If the commercial market gets slammed hard enough, that might see some action. Maybe farmland — not now, but a bit later???
It would be interesting to know how many of the recent “cash” deals might be financed by foreign USD holdings.
It’s entirely possible we’re looking at the beginnings of another stock market bubble, IMHO.
I can’t wait to see how this
I can’t wait to see how this ends
It ends in collapse, like all ponzi schemes…
Arraya wrote:I can’t wait to
[quote=Arraya]I can’t wait to see how this ends
It ends in collapse, like all ponzi schemes…[/quote]
Stein’s Law:
“If something can’t go on forever, it will stop,”
As far as government manipulation of the market, the $8k first time buyer credit and the Fed’s efforts to drive down interest rates combined to raise my maximum purchase price from around $210k last summer to a little over $240k this spring. That’s more than 14%, and yes–I took the bait and bought in at $239k. The effect of the tax credit should be more pronounced in cheaper markets.
This is not monetary policy
This is not monetary policy or stimulus, this is government takeover. There is no plan for FRE and FNM aside from continuously funding their losses. We are more than half way through 2009 and the real estate market is completely survived by Bernanke’s purchases. In six months, Bernanke’s announced MBS purchase plan would be over. He is on pace to use up every penny of the $1.2 trillion he printed for this purpose. What is his exit plan for 2010?
This is the biggest bailout right here. The Fed is paying top dollar for MBSs because nobody else will buy them.
Wall Street profitable? Paid back TARP? How much money do they make from the sales of MBSs to the Fed?
On the other side of the equation, wage and employment deflation rule the day. Which makes the whole thing a losing battle.
4plexowner wrote:the
[quote=4plexowner]the conclusion I would draw is that we are in a CON-fidence game – as long as printing press money continues to flow AND the people’s confidence can be maintained, the real estate market will continue along its current path
human’s are fickle creatures and confidence can be lost overnight[/quote]
Reminds me of the video, “Inevitable Collapse of the Dollar”:
http://www.youtube.com/watch?v=4n3g5lUgkWk
WaitingToExhale wrote:I’m not
[quote=WaitingToExhale]I’m not sure what to make of this write-up. There are lots of important points, but I think the actual conclusion is the author believes real estate shouldn’t be at the bottom, but can’t figure out whether it is or not due to current and possible future government interference.
Is that the point?[/quote]
Never bet against the Fed.
Banks have shoveled 13.9T
Banks have shoveled 13.9T onto the Fed balance sheet.
Another figure I saw was 24T in total backstops and guarantees.
Of course, the outstanding debts far outweigh these numbers. And what happens when 1,2,3,4 trillion dollars of losses are tossed onto the taxpayer as these debts go bad? Just add it to the tab, Mo? We have hundreds of billions of agency debt that *may* be sold over the next weeks and months – these sales will be very telling as to future interest rates.
I don’t know why we assume the Fed can print forever just to prop up housing prices. Our extortionists are stupid, but not that stupid.
I will maintain they are only trying to control the crash now underway, not trying to precipitate out of control inflation some of you are literally banking on. They are having some modicum of succes so far in controlling the speed of descent, and I heartily admit none of us knows what will come next as animal spirits can squash rationality. However, I believe in the long run we need to act on rationality and what is “right”, not “it’s different this time”, “buy now or be priced out forever”, and “it’s a new paradigm!”.
Very nice analysis.
Very nice analysis. Thanks.
These are end-game tactics. Checkmate seems inevitable.
Most mortagaged properties that are underwater have two owners with very different equity positions. The borrower has zero and the lender has 100%. Highly unstable conditions in a downward trending economy.
Article from last year…
Article from last year…
http://www.bloomberg.com/apps/news?pid=2…
“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” Yu said in e-mailed answers to questions yesterday. “it is not the end of the world, it is the end of the current international financial system.”
Hi Arraya, I think I’ve got
Hi Arraya, I think I’ve got a better link here.
“Freddie, Fannie Failure Could Be World `Catastrophe,’ Yu Says”, by Kevin Hamlin, Bloomberg, August 22, 2008.
This goes back to the farce of an “effective” guarantee on Agency Debt. Note that I’m asserting (below) that the Fed is covering up a continuing flight from agencies that didn’t stop on the first of this year (as the Fed is reporting in their statistics). The other side of the coin is that FHFA and the Treasury Dept can’t offer an explicit guarantee, because then the OMB would have to report a doubling of America’s nominal national debt. Is this a fine mess or what?
peterb wrote:Very nice
[quote=peterb]Very nice analysis. Thanks.
These are end-game tactics. Checkmate seems inevitable.
Most mortagaged properties that are underwater have two owners with very different equity positions. The borrower has zero and the lender has 100%. Highly unstable conditions in a downward trending economy.[/quote]
no, The Borrower has -10% and the Lender has
90%
very unstable.
patb wrote:….The Borrower
[quote=patb]….The Borrower has -10% and the Lender has 90%…[/quote]
California is a non-recourse state (and even non-purchase money loans are rarely collected).
So the lender has the risk. The “owner” is only at risk for their own downpayment. Once that is gone, they have no equity and no obligation.
Worse news at H.4.1
Worse news at H.4.1 report
I’ve added a link for this article to my Friday post “Gotcha! The Federal Reserve is a Foreign Central Bank” and Su’s work adds a lot of insight to what I’m saying there.
If, as I think, a lot of those Fed MBS purchases have been used to offset continued foreign central bank sales of agencies (and if you think that those sales stopped dead on January 1st like the NY Fed is asserting I’d love to hear a logical reason) then we’re in even deeper doo-doo than would be implied if those purchases were merely to keep the market going.
@SDrealtor
I guess it’s a new
@SDrealtor
I guess it’s a new paradigm?
What are the knock-on effects going to be when this “inflation” gets going? I guess we will magically get low rates, high wages, high property prices, leverage to triple digits, and this built upon a still record consumer debt levels? And this will be sustainable and lead to panacea?
It’s amazing what a temporary blip in inventory has done to the psychology of San Diegans.
Good luck all.
deriving that is the thing.
deriving that is the thing. The clients that I have all been working with are in no way thinking that the market is turning around. They fully expect continued depreciation. They are not buying because of financial reasons in any way, shape or form.
In fact some of them are arguing that having a low mortgage rate and a tangible asset are a headge against runaway inflation. That even with sharp decreases in pricing, that they will not have enough cash to take advantage of the situation.
I am not saying I agree with this mentality.
By far the bulk of them are simply tired of renting and are buying for there own personal reasons. Those that don’t agree with them label them knife catchers and other nice names. In reality they are buying for reasons that have nothing to do with thinking the market is at a bottom or turning around.
SD Realtor wrote:deriving
[quote=SD Realtor]deriving that is the thing. The clients that I have all been working with are in no way thinking that the market is turning around. They fully expect continued depreciation. They are not buying because of financial reasons in any way, shape or form.
In fact some of them are arguing that having a low mortgage rate and a tangible asset are a headge against runaway inflation. That even with sharp decreases in pricing, that they will not have enough cash to take advantage of the situation.
I am not saying I agree with this mentality.
By far the bulk of them are simply tired of renting and are buying for there own personal reasons. Those that don’t agree with them label them knife catchers and other nice names. In reality they are buying for reasons that have nothing to do with thinking the market is at a bottom or turning around.[/quote]
While I am seeing a lot of the same, something occurs to me.
I don’t disagree about the danger of pending inflation, but isn’t it going to wait until we are not 10M jobs in the hole?
What forms to people see jobless inflation taking?
I just don’t have enough of an idea to picture it.
A currency decline can cause
A currency decline can cause inflation regardless of economic strength or lack thereof… fwiw I’m becoming more suspicious that this is the way it will go down.
rich
Rich Toscano wrote:A currency
[quote=Rich Toscano]A currency decline can cause inflation regardless of economic strength or lack thereof… fwiw I’m becoming more suspicious that this is the way it will go down.
rich[/quote]
Your assuming that the foreign currencies hold while the dollar declines solo. Are you becoming suspicious enough to bet a pitcher of fine beer?
capeman wrote:
Your assuming
[quote=capeman]
Your assuming that the foreign currencies hold while the dollar declines solo. [/quote]
Yes, that’s what I mean by a currency decline… a decline of one currency against others.
However, your scenario would be inflationary too… even if all currencies are “declining” at the same rate, presumably they are declining against something — what are they declining against? I assume it’s stuff that people buy… meaning that nominal prices are rising in all currencies.
As for the pitcher of beer — PM me.
rich
That thing so many people
That thing so many people call “money” is really mostly credit. What’s happening to credit? The only trick the govt can do is to have the Fed buy Treasuries with money they may not actually have. I agree, it cant go on forever. If the rates on the long bond keeps upward, the game may change drastically fast.
Rich Toscano wrote:
Yes,
[quote=Rich Toscano]
Yes, that’s what I mean by a currency decline… a decline of one currency against others.
However, your scenario would be inflationary too… even if all currencies are “declining” at the same rate, presumably they are declining against something — what are they declining against? I assume it’s stuff that people buy… meaning that nominal prices are rising in all currencies.
As for the pitcher of beer — PM me.
rich[/quote]
Prices of all stuff that people buy can’t rise simultaneously without changes in money supply, unless something else is going on. It’s a basic accounting identity – total value of all goods and services purchased in the economy during some period of time, equals money supply times velocity of money (i.e. how often any given dollar changes hands). For prices of everything to go up, we need more money in people’s hands (i.e. higher salaries), fewer goods to go around (maybe a wide-reaching supply shock such as oil shortages that limits everyone’s ability to produce stuff), or higher velocity (higher consumers’ propensity to spend). Numbers 1 and 3 are likely to lead to lower unemployment before they lead to inflation.
Eugene wrote:
Prices of all
[quote=Eugene]
Prices of all stuff that people buy can’t rise simultaneously without changes in money supply, unless something else is going on. It’s a basic accounting identity – total value of all goods and services purchased in the economy during some period of time, equals money supply times velocity of money (i.e. how often any given dollar changes hands). For prices of everything to go up, we need more money in people’s hands (i.e. higher salaries), fewer goods to go around (maybe a wide-reaching supply shock such as oil shortages that limits everyone’s ability to produce stuff), or higher velocity (higher consumers’ propensity to spend). Numbers 1 and 3 are likely to lead to lower unemployment before they lead to inflation.[/quote]
Money supply is (and has been) rising.
rich
Rich Toscano wrote:
Money
[quote=Rich Toscano]
Money supply is (and has been) rising.
rich[/quote]
For all the inflationary efforts of the Fed, M2 has been basically flat since January.
…and had skyrocketed before
…and had skyrocketed before that (an increase which has not yet manifested in prices).
Though to be honest I’m a lot more concerned about future money supply growth than that of the recent past.
rich
“even if all currencies are
“even if all currencies are “declining” at the same rate, presumably they are declining against something — what are they declining against?”
every analyst seems to have a different answer to this question – the objective is to be invested in whatever it is that fiat currencies are declining against
we don’t have to think of it as ‘investing’ – let’s call it ‘protecting ourselves from currency devaluation’
some of the possibilities: bonds, precious metals, tangible goods (food, tools, energy, survival gear, guns/ammo – ie, ‘stuff’ and the means of producing more stuff)
my opinion inre these items
– bonds: it’s still paper but as long as they are short term US Treasuries and the government remains functional (and doesn’t default on its debts) this could be a place to park some fiat currency
– precious metals: humans have chosen this asset class for thousands of years whether as a daily monetary unit or as a store of value during financial crisis – I’m betting that they will do so this time around as well
– tangible goods: I suspect this is where we will see the biggest impact of currency declines – this will also cause the most pain because the things we need to survive fall into this category
one of the questions we are all interested in is, “does real estate qualify as a tangible asset that will benefit (ie, inflate in value) as a result of a currency decline?”
given the overall state of the economy (unemployment and debt levels being just two significant factors) I have a hard time imagining how real estate will benefit if the US dollar is devalued – in particular, if the devaluation results in higher interest rates for mortgage products real estate will take another big step down the price curve
as a precious metals fan I like the stories about people buying prime real estate for a single gold coin during some of our past financial crisis – I’ll trade one of my two coins for a Point Loma view property and the other one for an apartment building on Coronado Island!
Central Banks have recently
Central Banks have recently become net buyers of gold. This has not happened since the 1980’s.
Anyone who thinks that the
Anyone who thinks that the Fed and Gov’t can keep up this game indefinitely should read my prospectus on a spectacular new invention I’m working on. It’s called the perpetual motion car and it’s really going to hit the automotive industry like a megaton warhead (yes it creates it’s own nuclear fuel as well). I think you’re just the special crowd of investors to help get in on the ground floor equity stake in this new venture. We’re going to change the world with it and make gazillions in the process!
BTW- A gazillion at time of receipt may only be worth $100 of today’s dollars under your current thesis but we’ll all be making 10,000 gazillion dollar salaries at that time so it will be sweet!
I agree that the question of
I agree that the question of whether real estate has bottomed is difficult to answer in general terms. But insofar as it affects California, it would be nice to hear some views.
On the demand side, the pool of buyers may be small but I’m not sure if that is because would-be buyers already bought during the subprime era. Isn’t there a natural recurrence of buyers brought about by demographics. I would have thought the pool is small more as a result of economic factors. On the supply side, the author notes that a “big chunk” of would-be sellers is not apparent due to negative equity issues. What about all the people that bought before the housing bubble started. Doesn’t that represent I sizeable (possibly bigger) chunk? It seems to me that supply is also being affected by the large paper losses this group of would-be sellers is unhappy to entertain.
I feel compelled to chime in.
I feel compelled to chime in.
Two to three years ago, I was anti-California real estate. I thought anyone who paid the prices that were being asked, especially in So Cal, were certifiably nuts. I still believe anyone who bought back then was crazy. I’m sure people will say the same thing today about my purchase.
Like SD Realtor stated above, not all home purchases are based upon the premise that there must be a monetarily related ROI with the property. For me, the ROI will be watching my kids grow up in a great neighborhood, in a fantastic community, and knowing that when I get this sucker paid off I won’t be working anymore and can really start to enjoy my life. I think I got a fair price or else I wouldn’t have pulled the trigger. It’s more than I ever thought I’d ever spend on a home in my lifetime, but then again I’m paying more for a gallon of gasoline than I ever expected to in my lifetime as well.
I know that the gov’t in propping up this very precarious situation right now, and I think they will continue to do so until the economy, and the housing sector specifically, finally reaches the “soft-landing” that the “experts” thought would happen on its own. that’s my opinion, no scientific or quantitative data to support it, just my gut feeling, and my gut also told me to start reading Piggington three years ago too. Pretty smart gut.
We live in a fantasy world
We live in a fantasy world controlled by banks and brilliant politicians that seem to find ways to live in mega mansions with small salaries!
Every assumption is completely true and false at the same time. Common sense doesn’t apply to anything in the market and I truly believe it won’t ever again. If you think that the stock market is controlled by revenues you are completely mistaken. If you think the housing market is controlled by supply and demand again you are making false assumptions.
Now is a great time to follow the government interactions and study how they will affect all markets. New rules are instated on a daily basis, which will continue to increase the debt and the money supply. The only way things will ever change from this point forward is a total collapse of the system.
For some time I was predicting an economic collapse to happen in early 2009, boy was I wrong!! I didn’t realize how much power this country actually has! I can’t wait to read the history books in 2020, they should be pretty interesting!
Laws of nature always prevail
Laws of nature always prevail in the long term. This reminds me so much of the stock market bubble–the talk of a paradigm shift (which never happened), the endless top, the endless bottom. In the end, markets are driven as much by perception as they are by supply and demand. The best indicator of this that I know of is interest rates and the spread on interest rates between the ten year and the mortgage rates. As complex as the trees of the forest appear, in the end, it all comes down to money and the cost of money. The difficulty isn’t so much predicting what will happen, as when it will happen. Anything that is unsustainable eventually stops and this happens because the opposing forces gain strength exponentially while the driving forces dwindle hopelessly.
The problem really is the trap. To print money without a fundamental increase in the value of the money creates a trap. On the one hand, balance can be restored through inflation (or devaluation of the currency). In the absence of perception, this might be true. But in the presence of perception, rising interest rates won’t be able to offset the drop in perception (or confidence) and the system as a whole fails. What happens next is up to us.
One of the early indicators of this, in my opinion, will be an increase in interest rates to double digits and an increase in the spread. When it will happen, is impossible to predict.
Your article is more than
Your article is more than funny. Especially the comment: “The real estate market is in such a precarious position supported by an unbelievably accommodating Federal Reserve that I find it difficult to call it anything” I found that to be absoulutly hilarious. I do not know what to make of it either. HAHA. It is more of a curiosity than anything to me.
Incidently, printing press is old fashioned. It’s more like they type in numbers on a computer now and send them. So instead of getting paper for to buy your house. Now you have computer numbers you can trade. For anything you want.